Trump won, but the market played a trick on us

10.11.2016

Before the elections, we published some analytics based on the pre-elections economic conditions and historic market data. However, the market ruined all forecast attempts and committed something unexpected even for eminent analysts. There have been, however, some predictions that are still waiting to be confirmed, while a small portion of them seems to be right. First comes first, though.

Deceived: the market did not support Clinton

Before the elections, the market threw us a curved ball: it behaved as if it had supported Hillary Clinton, but then suddenly soared after Trump’s victory. Take a look at this chart:

S&P 500 chart for the last month. The negative trend was present until November, 6th, until the FBI delivered a favorable statement for Clinton. The index immediately started growing, but for some reason it continued the upward race even after her defeat.

Obama’s presidential terms were marked with significant index growth — all in all, 12-13% per annum on average. 2016 was not an exclusion: it was the year when all economic indices set new all-time records. However, they started falling when Clinton’s popularity declined. The fiercest downfall started at the end of October when the FBI released news that they were analyzing Clinton’s messages from an unauthorized server. The decline continued until November, 6th. The FBI admitted that they were not going to file any criminal charges against her, and the market went back up to the week-old positions.

This clearly indicated that investors were afraid of Clinton’s defeat, which was even openly pronounced by many business leaders. E.g., JPMorgan’s analysts said, ‘We believe that if Trump wins, markets are likely to fall further – one should not use the Brexit template where stocks bounced quickly.’

What happened on November, 9th after Trump’s triumph, then? The market did not fall, and it even started growing more quickly. As we can see from the chart, up to now the market has recovered the whole month’s losses. If it continues going this way, soon it will reach the records of summer 2016.

Who’s in charge of the wrong forecast?

We still do not know how the indices will behave tomorrow or in a week. However, the unfolded growth was totally unexpected for most analysts, so it has become a good reason to frame some theories. This are, for example, the ones suggested by Capital Economics.

Version 1. Brexit pattern

Although JPMorgan analysts had predicted that Trump’s victory will make things even worse than Brexit, in fact it all turned out exactly the way it was after Brexit. We mean, it all looked as if investors had been afraid of Britain’s exit from the EU, but then realized that nothing scary was happening.

This may be a typical reaction of the modern investor to an unlikely event: first this event frightens, but when it proves to be not so ‘unlikely’, it does not seem so dreadful anymore.

Version 2. Trump’s calming speech

When the results of the elections became clear, Trump made quite a mitigating speech. It prompted suggestions that all his rigorous pre-election promises are just mottos. In fact, he admitted that he is not as radical as he pretended to be.

Version 3. Parliamentary elections effect

The presidential elections clashed in time with the parliamentary votings, and both of them were won by the Republicans — in both chambers. The margin in the parliamentary elections was not as big as in 2014: the Republican party now has 51 seats in the Senate against the 47 Democratic seats. As for the House of Representatives, the misbalance there is stronger, but still smaller than before.At the same time, we must remember that Trump disagrees with party comrades in many points, for example, when it comes to taxation. It means that the checks and balances of Obama’s period will still remain effective.

In addition to Capital Economics’ propositions, we should also mention that, according to the statistics since 1928 (which we have mentioned in our previous article,) the conditions for the market growth are more favorable when the President and the Parliament belong to one party. When it was so, S&P 500 index grew on average by 8.45%. The worst market conditions were reached when two houses of the Parliament were represented by different parties. During such years S&P 500 grew only by 2.75%. Competent investors may have thought that the current situation is good enough for the economics, and stopped unwinding the panic: all in all, it could be much worse if the Republicans lost control over one of the Parliament chambers.

Version 4. Economics feels alright

Whoever is the President, the current economic state of the US is more than satisfying, so there is no reason to panic. In all sincerity, it is not a self-standing version, it is more of an afterthought to Version 1: enough is as good as a feast, no need to panic anymore. Investors understand that there has been no catastrophe, that the economy still works as it should, and calm down.

Besides these more or less logical versions, there are also some conspiracy ones.

Version 5. The White House conspiracy

We still cannot rule out that the market downturns during Clinton’s misfortunes could be artificially created by large market players working for the White House. They might have sold their assets to create an illusion that investors would accept only Clinton as the President, and that Trump’s victory will lead to a catastrophe. It is impossible to prove it right or wrong, but this attitude was sure one of the reasons to vote this or that way: many investors voted for Clinton only out of fear. Luckily, their fears have not come true yet.

Version 6. Anti-prognostic essence of the market

Long ago traders noticed that the market often acts as if it stood against the attempts to forecast its movements, especially when this forecast was made by an amateur, and when it seemed too evident. For example, in the late 2000s the price of gold seemed to continue growing eternally, and everyone started buying it. Later, the quotes ‘cheated’ amateur analysts and stopped growing. These elections may have followed the same scenario: once the market trends became too evident, the rule went south.

The market is unpredictable. It can predict, though

Nevertheless, one of our auguries was fulfilled. We mentioned that the power shifts happen when the elections are preceded by a 3-month market decline. This rule worked for 19 out of 22 presidential elections from 1928 to 2012 (86.4% of cases.) Did it work this time?

S&P 500 chart for three months. The negative trend persisted from September to November, 6th. In the end, the index did not get back to the starting level.

As we can see from the chart, the general market trend was descending. The situation started improving on November, 6th, but by November, 8th, the overall 3-month index change was negative, and amounted to –41 points (or 2%.) After Trump’s triumph it decreased to –18 points (1%.) The rule worked again: the White House changed the master party. 20 wins out of 23.